Gafisa Considers Share Buyback as Losses End: Corporate Brazil

Gafisa SA Chief Executive Officer Alceu Duilio Calciolari said, “Everything we needed to do has been done. With better results, we may consider the possibility of buying back shares and paying additional dividends.” Photographer: Scott Eells/Bloomberg

Gafisa has been shifting its focus to building more
lucrative projects as part of a turnaround plan that Calciolari
said will be completed by the first half of 2014. Brazil’s
fifth-biggest homebuilder by revenue lost money in each of the
past two years as it overestimated potential profit from a
government-sponsored program for low-income families and built
inexpensive homes faster than it could sell them.

“We’re correcting our past mistakes,” Calciolari said in
a Nov. 8 interview at Bloomberg’s office in Sao Paulo.
“Everything we needed to do has been done. With better results,
we may consider the possibility of buying back shares and paying
additional dividends.”

Surging economic growth and government subsidies aimed at
getting lower-income Brazilians to buy houses encouraged Sao
Paulo-based Gafisa and other homebuilders to expand with new
projects throughout the country from 2008 to 2010. The builders
have been retrenching as home sales slumped after the country’s
economic expansion slowed to 0.9 percent in 2012 from a peak of
7.6 percent two years earlier, leaving a glut of unsold houses.

‘Decisive Year’

The BM&FBovespa Real Estate index, a gauge of 20 industry
stocks, has lost 33 percent since the end of 2010, compared with
a 25 percent decline for the country’s 72-member Ibovespa equity
benchmark.

“Most of them started to review operations and make
adjustments in 2011, so 2014 will be a decisive year for the
industry to show that its strategy worked,” Felipe Silveira, an
analyst at the brokerage firm Coinvalores, said in a phone
interview from Sao Paulo. “Gafisa’s profitability is still
suffering because of the old projects’ problems, and we should
see low margins for some time.”

Projects started by Gafisa’s low-income housing unit,
Construtora Tenda, before the restructuring began in 2011 have
margins of about 3 percent, and the last of them will be
delivered in the next six months, Calciolari said. Margins at
its other two units range from 35 percent to 50 percent, he
said.

‘Unique Situation’

Proceeds from a 1.4 billion-real ($605 million) sale of its
70 percent stake in Alphaville Urbanismo SA, expected to close
this year, will be used to reduce Gafisa’s debt-to-equity ratio
to about 55 percent from 126 percent currently, according to the
company’s third-quarter earnings report. Remaining cash may be
distributed to shareholders, Calciolari said.

Gafisa pays 25 percent of annual net income as dividends
and made its last distribution in December 2011, the company’s
press office wrote in an e-mailed response to questions.

The Alphaville sale puts Gafisa in a “unique situation,”
according to Guilherme Affonso Ferreira, who is chief executive
officer of closely held investment firm Bahema Participacoes SA,
Gafisa’s 17th-biggest shareholder according to data compiled by
Bloomberg. The money will enable the company to effectively
reduce its obligations to zero, leaving it with debt that's
considered transitory and is passed on to home buyers when units
are sold, he said.

“Once the deal closes you won’t have any more corporate
debt,” Ferreira said in a phone interview from Sao Paulo.
“Among construction companies, few right now can cite this
luxury.”

October Sales

Gafisa’s shares fell 1.7 percent to 2.85 reais at the close
of trading in Sao Paulo, extending this year’s decline to 39
percent, as the real estate index slid 24 percent.

While the company’s turnaround strategy appears to be
working, Silveira said he’s still not sure if it will spur a
rebound in the stock.

“Earnings are improving, sure, but they still seem so weak
given the company’s size and potential,” he said.

The company posted adjusted net income of 15.8 million
reais in the three months through September after three
quarterly losses, according to data compiled by Bloomberg after
Gafisa reported earnings on Nov. 5. That exceeded the average
estimate among five analysts surveyed by Bloomberg of a profit
of 12.7 million reais.

Gafisa’s contracted sales were 370 million reais in
October, Calciolari said. That compares with the 429 million
reais that the company reported for the entire third quarter.

“This is a good indicator about the demand climate,”
Calciolari said.

‘Growth Potential’

Stock investors don’t fully recognize the success of the
company’s turnaround plan because they are excessively focused
on the short term, Calciolari said.

“Homebuilders have a long business cycle,” he said.

Gafisa will remain focused on building in Sao Paulo and Rio
de Janeiro through 2015, Calciolari said. Projects marketed to
lower-income consumers, which fell to zero last year and were
resumed in 2013, may increase as Tenda’s operations improve and
margins rise to a projected 28 percent, he said.

“This percentage gives the company an interesting
return,” Calciolari said. “Growth potential in this segment is
high.”